Wednesday, April 11, 2007

10 Years of New Labour - Debt as a % of GDP

Labour's critics like to claim that the reason that the economy has done well in the last ten years is because government debt has increased. But how true is this?

The following table on debt as a % of GDP comes from Eurostat. Please note that in accordance with EU code ESA95, Eurostat includes all PFI debt as part of consolidated government debt. Therefore the figures quoted for the UK will be higher than those produced by the UK Treasury. The figures also include all local government debt and state government debt as well as federal government debt, therefore the figures for the USA will be higher than those generally published by the US Treasury, which quote federal debt but not state debts. The aim behind these figures is to give a true picture of debt by including all possible sources of government debt. All figures are as at December 31st of the year in question.

As before, the comparison in the following table is with other mature economies with a similar sized population (to see the entire EU's data, click the link above).

Germany's position deteriorates as a direct result of unification, when they embark on massive construction projects in Eastern Germany. Debt starts to fall as Schroeder takes over in 1998. but the post 2002 recession scuppers progress. Miterrand hands over a pretty good position to Chirac in early 1995, but things immediately deteriorate, with the post 2001 recession worsening things. Italy however makes valiant efforts to reduce debt, regardless of recession. In the USA, in the Clinton years debt starts to fall, but post 2001-recession means that debt starts to rise again. Much US debt is hidden in the state finances, and their overall position is not much that different to France and Germany, ironical given how Americans like to criticize the French and Germans. Japan is a complete and utter horror story - like Italy they face an aging population with the overall population falling, but unlike Italy, they worsened the level of debt that their future smaller population will have to bear.

Spain achieves stonking success - but it's worth noting that they are net recipient of EU funds, whereas the UK taxpayer managed to reduce debt even while being net contributers to the EU. However if Spain manages to keep up their record when EU funds are withdrawn this year, they are surely contenders to become one of the most important EU countries in the next decade, especially as they have a substantial population (circa 40 million).

The UK makes solid progress in reducing debt as a % of GDP, even while spending a lot on new hospitals and schools. One could argue that if no new schools and hospitals were built the debt would be even lower - but can a civilised country continue with it's infrastructure crumbling? The rebuilding of the last decade rivals that of the public building done during the late Victorian period. I believe that people in future decades will benefit and be grateful for it in a similar way that mid-20th century people were grateful for the Victorian expenditure. Debt in the UK too has crept up in response to the global recession of 2001-3. But fiscal policy is being tightened over the next three years, and debt should start falling again. And it's worth pointing out that in 2005, debt as a % of GDP was a full 9.9% lower than at the end of 1996. Something the Tories would be crowing about if it was they who had achieved it. Overall New Labour has improved the position compared to the one they inherited, even while rebuilding the infrastructure, and they have also kept debt lower than all other major economies of a similar size, bar Spain. People across the planet would give their limbs for such a record.

4 comments:

One of many disgraceful things about the Thatcher/Major years was the failure to pay off national debt with money generated from privatisations and revenues from North Sea oil. Instead these were used to keep tax rates artificially low.

This practice was described by many (even some Conservatives)as being like selling the family silver to pay for a party or burning the floorboards to keep the house warm.

Labour's record is far more impressive although their opponents will use the absolute debt figures rather than the % of GDP ones because these suit their feeble case better. But that's a bit like carping about the rise in GDP...

hughes, I agree with you. When you sell off assets you should use the proceeds to pay off liabilities. Annual expenditure should be financed out of annual income, not sales of assets.

Re the absolute debt figures, these too arn't that bad, they've only risen modestly unlike during John Major's period, when he managed to double the national debt. At one point his budget deficit was 7% of GDP. The whole reason debt as a % of GDP has fallen under New Labour, is because debt has been increased at a much slower rate than that which the economy has grown.

You do get Tories carping about the expenditure on infratructure - but these are the types of people who would not replace a few tiles that have blown off their roof to save money - and then end up shocked that the roof has weakened and needs a much bigger expenditure to put right.

Going forward, expenditure on infrastructure won't need to be so big, because there won't be as many roof repairs to do so to speak. We'll be able to revert to prudent maintenance - something that should have been done during the 18 Tory years, but wasn't.

And compared to the rest of the world, particularly the USA, we are in a very healthy position indeed.

The moral must be, stick to Tory spending plans and debt/GDP will go down by 2% a year (until year 2000, figures flattered by one-off £22bn from 3G auction), open the taps again (since 2002) and debt/GDP will go up by 1% a year.

And that is during the GOOD TIMES -surely we should continue paying off debt during the GOOD TIMES because the bad times are going to come around sooner or later.

Mark - 2002 onwards was the bad times - there was a global recession on, you know! That's why the spending taps were opened. You are only under the impression that everything was hunky dory because the government took prompt action to mediate the situation (with money they had carefully saved when there was a massive boom from 1997 to 2002.)

The world economy is in a healthy state now, and fiscal policy is being tightened again.

BTW, Tories like to go on about the two years of Tory spending plans that Labour pledged to keep to. But 1997-2002 was a six year period. Spending was kept tight throughout this period because there was a worldwide boom, and New Labour adopts a counter-cyclical policy (in boom years tighten fiscal policy, in times of global weakness, loosen).

And the proof is in the pudding - debt as a % of GDP is lower than in 1997, even through a global recession, terrorist attacks, wars etc.

Tories would not have managed to achieve this. Under the Tories there would have been a bust in 2002, and then debt would have spiralled as in 1993 to pay for dole payments and the like.